Two Chinese fund management firms are planning to focus their overseas investments on stock markets, after domestic fund management firms were allowed by China's securities watchdog earlier this month to follow commercial banks into overseas securities.

The move would teach domestic fund management firms how to invest globally and help alleviate the pressure of soaring foreign exchange reserves on China, said analysts.

China Southern Fund Management Co. Ltd, approved last week as a qualified domestic institutional investor (QDII), will select 48 countries and regions for its portfolio, with initial investments targeting shares listed in Hong Kong and global funds.

Southern Fund, based in the southern city of Shenzhen, expected to launch its first QDII product in one or two months with a quota of US$ 1 billion, said company general manager Gao Liangyu.

China Asset Management Co. Ltd. (China AMC) would also have its first QDII product focus on overseas stock markets, including developed markets in the United States, Europe, Japan and Hong Kong and in some emerging markets, the Shanghai Securities News reported on Monday.

A maximum of 30 percent of the Beijing-based firm's quota would be channeled into the stock market in Hong Kong, while a smaller part would fund overseas bond purchases.

The investment strategy of the two firms will be different from that of the commercial banks, which mainly invest in international money markets, bond markets or a single stock market.

As share values in China's markets continue to rise, "diversified investments around the globe are the only way to reduce risks", said Xie Weihong, director of the international department of Southern Fund.

Global investments would also enable domestic investors to benefit from world economic growth, said the report, citing figures from Morgan Stanley, showing the A share market yielded an annual average rate of 45 percent over the past three years, while returns were even higher in the markets in Egypt, Argentina and Indonesia.

Investing in countries whose currencies were expected to appreciate against the yuan would help investors evade exchange losses, it added.

Southern Fund has signed an agreement with US-based Mellon Financial Corp., a US-based global financial services company, to co-develop the first QDII product, while China AMC has chose the US-based T. Rowe Price as its consultant for overseas investment.

The China Securities Regulatory Commission (CSRC) allows fund management firms with net assets of more than 200 million yuan (US$ 26 million) and more than two years of operational experience and securities dealers with net assets of more than 800 million yuan and more than one year of investment management operations to apply for QDII status.

About 20 Chinese fund management firms met the standards, said Li Zhengqiang, a CSRC official.

By the beginning of July, the State Administration of Foreign Exchange (SAFE) had approved a quota of US$ 20.5 billion: US$ 14.8 billion for 19 banks, US$ 5.2 billion for four insurance companies and US$ 500 million for one fund management company.

Last year, Shanghai-based Hua An Fund Management Co. Ltd. became China's first fund management firm to be allowed to invest overseas as a pilot QDII, with a quota of US$ 500 million.

Its first QDII product, launched in November last year, raised US$ 197 million and yielded five percent during the following six months.

(Xinhua News Agency July 31 2007)